Disruptions in energy markets linked to a slowdown in global growth have had a major impact on the shipping industry. Container trade, which primarily caters to consumer demand as well as machinery transport, is being instituted with what are known as “tactical voyage cancellations” in response to low demand. At the same time, the tanker trade is enjoying abnormally high charter rates, says LiveMint.
The article mentions that normally, around the time of September to November, there is an increase in the flow of goods from manufacturing centers in Asia to meet the demand of the festive season in Europe and America. Walmart and Home Depot often rent entire boats and cargo planes.
This year, however, First World retailers are struggling to shift inventory. Freight and logistics agents are faced with few orders and low rates. Maritime research firm Drewry says 117 sailings out of 744 scheduled voyages in October have been canceled on the Trans-Pacific, Trans-Atlantic, Asia-Northern Europe and Asia-Mediterranean routes. FedEx says it is reducing cargo flights. Trade experts believe that this weak trend will continue until at least the Chinese New Year (end of January 2023).
The collapse is reflected in contracted freight rates. The Drewry World Container Index, which tracks the average cost of shipping a 40-foot container around the world, has fallen 65 percent from an average of $9,865/container in October 2021 to $3,383 this week. Freight on key routes such as Shanghai-Los Angeles and Shanghai-Rotterdam have been further reduced, by 77% and 70% respectively. Spot container rates are also down, around 30 percent, in the last 12 months.
The Baltic Dry Index, which tracks the movement of bulk commodities such as coal, grain and iron ore, is down 58% in the last 12 months. This is another data point indicating weakened demand.
However, the rates of tankers (tanks of products such as transporting crude oil) are through the roof, due to fears of interruptions in supply caused by the Ukraine War. Gas tankers are also in high demand. More disruption to energy markets is expected as EU sanctions on Russian oil and gas take effect, just as demand for heating surges across the Northern Hemisphere.
VLCC (Very Large Tanker) rates are at 30-month highs. LNG tanker rates are even higher. VLCC contract rates have jumped from an average of $6,700/day in calendar year 2021 to almost $100,000/day in October. LNG rates are already over $100,000 a day. About 10 percent of LNG tanker capacity is currently used for storage rather than shipping, as traders speculatively stock up on gas ahead of Europe’s winter. The economics of gas trading are mind blowing right now. A cargo of natural gas purchased at current US prices and sold in Germany will generate profits equal to 70-75 percent of the value of the tanker carrying that cargo.
Overall, all shipping rates remain well above pre-pandemic (2019) levels, due to port congestion and container shortages. Container manufacturing was deeply affected by Covid-19. Some 90 per cent of containers are made in mainland China and Hong Kong and the industry is struggling to cope with a combination of raw material shortages and ongoing lockdowns.
The shipping industry is also facing several other issues that could affect it until 2023 at least. An oversupply of ships is anticipated, along with a deep labor shortage. ING estimates that 14 percent will be added to global capacity in 2023 as new ships are launched.
But there is a labor shortage in the workforce of seamen and port personnel. About 15 percent of the world’s maritime community comes from Russia and Ukraine, and the war in Ukraine has led to tightness. Inflation has also led to demands for higher compensation from sailors and port workers. Industrial strikes and actions are affecting work in many ports in Europe, Korea and the United States. Climate change has also had a negative impact. Low water levels in rivers in Europe and the US have caused inland water transport systems to become clogged, ruining a key component of the logistics chain.
Shipping is, of course, hypersensitive to trade flows, which in turn are sensitive to global economic activity. The swings in freight and tanker contract rates are symptoms of serious ill health in the global economy. So are the complications in the labor market. A return to normal in shipping trends would also indicate that the global economy is back in shape, but that in turn will depend on geopolitics.